Now that Hank Paulson has recognised that the troubled asset relief programme is best used to recapitalise the banking system, it is important to spell out exactly how it should be done. Since it was not part of the Treasury secretary’s original approach, there is a real danger that the scheme will not be properly structured and will not achieve its objective. With financial markets on the brink of meltdown it is vital to make the prospects of a successful recapitalisation clearly visible.

This is how Tarp ought to work. The Treasury secretary should begin by asking the banking supervisors to produce an estimate for each bank, how much additional capital they would need to meet the statutory requirement of 8 per cent. The supervisors are familiar with the banks and are aggressively examining and gathering information. They would be able to come up with an estimate in short order provided they are given clear instructions on what assumptions to use. The estimates would be reasonably reliable for the smaller, simpler institutions, but the likes of Citibank and Goldman Sachs would require some guesswork.